Transferring Wealth to Your Grandchildren

At TAG, we are often asked to advise on Transgenerational Wealth™ management, including Trust and Estate Planning and other wealth transfer strategies to directly benefit their grandchildren. Some clients are looking for ways to bypass their children altogether, while others are eager to provide monetary support to their grandchildren, especially while they’re still around to see them benefit from it.

The government doesn’t look kindly on gifts to grandchildren and has imposed numerous tax burdens on certain generation-skipping transactions. There are several strategies, however, that can help you (and them) avoid onerous penalties. 

Know the Basics of the Tax Laws Governing Financial Gifts

Before making a gift to your grandchildren or anyone else in your family, speak with your financial and legal advisors and familiarize yourself with the tax laws. The implications of estate tax, gift tax, generation-skipping tax, and more should always be taken into consideration. For example, understanding that the lifetime gift exclusion in 2021 equals $11.7 million per person and applies to the total of an individual’s taxable gifts made during life and assets left at death, may impact the timing of your gifts: every dollar you gift today reduces the tax-free transfer amount when you’ve passed away. 

When it’s time to have a serious conversation about transferring your wealth, the person best equipped with the knowledge to guide and advise that strategy is your financial advisor. 

Help Your Grandchildren Get Ahead With Smart Gifting

Even before the pandemic, young Americans were saddled with more than $1 trillion in debt, comprised mostly of student loans. The average college graduate receives an average $30,000 student loan bill shortly after they earn their diploma. It’s not surprising then, that some wealthy people are eager to help their grandchildren and set them off on solid financial footing. These financial gifts—when managed properly—serve several purposes. They encourage your grandchildren to learn and maintain new, healthy financial habits and can set them up for a more stable financial future.

These are but some of the  options available for gifting directly to your grandchildren:

• Cash Gifts: The IRS sets an annual gift-tax exclusion which for 2021, is $15,000. If you and your partner have three grandchildren, you can each give each grandchild $15,000, for a total amount of $90,000 in 2021. These gifts can help with various goals:
  • Help your grandchildren save to buy their first home. High living and housing costs plus stagnant wages make homeownership a dream for far too many people. Saving to reach that 20% down payment often requires young adults to save much longer, living in apartments that suck away their money and give nothing in return.
  • Have older grandchildren? Help them reduce the principal on their mortgage. An annual $15,000 gift can make a significant dent in reducing a high balance.
• Help Save for College: Contribute to your grandchildren’s 529 plans. While state-sponsored 529 plans aren’t exempt from the gift tax limit, you can contribute up to five years of contributions at once.
• Set up a Brokerage Account: Only about two in five of today’s young adults have any familiarity with the stock market. Depositing funds in a brokerage account offers grandchildren a vehicle for long-term growth and wealth-building. If you are familiar with the stock market, you can guide them on their investment journey. 

• Help with Bills: If your grandchildren have medical or dental bills or school tuition, you can contribute to those bills—and the money won’t count toward annual gift limitations if you pay the provider or school directly. (Should you opt to help pay college tuition, check first to see how it might affect financial aid since direct cash payments by someone other than the parent counts as cash support and can reduce financial aid.)

Determine the best options for your family by talking to your TAG financial advisor today. Our Transgenerational Wealth™ management services offer clients tax-efficient strategies to spread the wealth and also provide ways to educate your grandchildren about how to manage their money and build wealth over time. And one day perhaps they’ll continue the tradition of transgenerational wealth transfer!

The information provided in this article is not written or intended as tax or legal advice, and it may not be relied on for purpose of avoiding any federal tax penalties. Individuals are encouraged to seek advice for the own tax and legal counsel.